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Done tinkering & DIY. 3 sleepless nights convinced me.
Old 03-13-2020, 11:38 AM   #1
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Done tinkering & DIY. 3 sleepless nights convinced me.

54 years old, been a DIY'er for years, outperform some years, underperform others. Forgotten how lousy I feel when i am at the helm and I underperform when there's a correction. I don't ever want this feeling again, and I'm giving up tinkering.

I've been doing lots of tossing and turning. I manage my wife and daughter's portfolios very conservatively but still a basic 60/40 ish stock bond setup with Vanguard funds. I don't touch their portfolios mroe than once a year. I did a little calculation and discovered that since 1-1-2020 my wife and daughter's portfolios only lost 10% while mine lost 15% ish. Why? My wife's is in 5-6 vanguard index funds, 17% cash (newest contribution), and I manage my "best girls" portfolios like my life depends on it (i.e. conservative and hands off, set it and forget it). Daughter's ROTH is 50% dividend growth, 50% STAR. Her UTMA is 100% Wellington. I USED to have my Vanguard account setup the same way, maybe slightly more complex but rarely fooled with it. Then converted it to brokerage and over the past year I've snuck in many 5K positions of "high income REITS, BDCs, MLPs, mREITS and CLO funds that I just couldn't pass up. All of which tanked $2 for every $1 of the S&P500 this week. I've finally made the irrevocable decision that I'm going to be a hands off index investor. A Boglehead, or nearly so. No more than 10 minutes a month rebalancing (if that).

The question now is how? I'm leaning toward this portfolio. Too complex? Can I just use Wellington or a 3 fund (TOTAL SM, TOTAL INT SM, TOTAL BOND) or will I get a better risk adjusted return this way? #1 goal is "80% of the return of the market with half the risk" (i.e. volatility, potential drawdown).

POSITION PERCENTAGE
TOTAL STOCK MARKET 20
SC VALUE 5
TOTAL INT'L STOCK MARKET 15
EMERGING MKTS 5
TOTAL BOND (INT?) 10
TIPS 10
ST BOND 10
FOREIGN (EM) BOND 5
REIT 5
BDC 5
GOLD 5
CASH 5
100



I love the idea of 3 fund or Wellington. I lean toward the 3 fund more because I can (and will) rebalance, and maybe get some rebalancing bonus that way or at least be able to withdraw retirement funds from whatever's doing the best. I did read on the bogleheads forum though, about low volatility world funds (Vanguard having one). I like the idea. Here is what I want, what is important to me, maybe you folks can guide me on the best approach: 1 or more of these desires or expectations might not be reasonable. Feel free to point that out of course!

1. Equity like returns but no special attachment to meeting or beating any particular benchmark as long as it's not too far below it. BUT with disproprtionately less volatiltiy. In other words, if I'm going to accept 10% less performance on average, I want 20% or more less volatility (I'm making those percentages up to illustrate the point)

2. Stress testing based on a Monte Carlo simulator which includes all big meltdowns should show this portfolio does not ever have a drawdown of more than 20%.

3. Side note: It strikes me at first glance as senseless to have any long-term bonds in a portfolio when 30 year treasuries are yielding less than 2%. I do realize that with the nature of zero coupon or very long term bonds, getting a rate cut from 2 to 1.5 can I can give a huge capital gain but I don't care ... it doesn't strike me as a good risk-reward picture to be invested in bonds that yield 1 or 2% but have a duration of 5% or more with rates this low. Can someone poke any holes in that? I know I know they're meant to anchor the portfolio and that nobody can time-to-market and so on but at certain valuations things cease to make sense. And if Vanguard Total Bond Fund (for example) is not a good choice due to the exposure to longer maturities in a low interest environment, what might replace it?

4. I want it to be simple. I am open to using managed funds if they have a long-term track record but I'm leaning toward index. For example I wouldn't lose any sleep worrying about leaving money on the table if every dime and my retirement account was invested in vanguard Wellington. But frankly I think even that is too volatile in a meltdown.

5. I would rather not do tactical asset allocation. I know it really can prevent big draw downs, but during bull markets it often vastly underperforms and so I would have to pay attention and check indicators, etc. deciding when to use it, when not to use it in such and that is antithetical to my goal which is do have a pretty much hands-off portfolio aside from making deposits and rebalancing. That's not to say I'm completely against it. If that's the only way to get to my goal of "80% of the return of the market with half the volatility" I'll do it. Perhaps when vanguard Total stock market dips below its 200-day exponential moving average I take 50% of it and move it to cash etc. Now I'm diversifying my investment style as well. 50% buy and hold & 50% TAA.

6. That being said, I did read about Larry Swedrow's research on low volatility strategies. Perhaps there's something simple along those lines I can use to reduce the volatility of a simple 2-4 fund portfolio?

Anyway, end of the story I'm going to simplify: I just want to make sure I "talk it all out" so I don't leave anything to wonder about (you know...6 months into having 400K in Wellington, that article about volatility management is still bugging me...)

Thank you for all your firm but gentle guidance you've given me thus far, and thank you in advance for any more that comes.
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Old 03-13-2020, 12:09 PM   #2
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Thoughts:

1) Except for SORR, volatility is not risk. SORR risk can be minimized with an adequate allocation/aka bucket on the fixed income side. We have that handled and consequently we do not worry at all about volatility.

2) We are basically "one fund" investors: VTWAX. We are happy to invest worldwide and let the market caps determine the US/International ratio.

3) Gold bugs will violently disagree but as Buffett has recently pointed out, over the past century it has done nothing except keep up with inflation. Its volatility, however, results in great stories by the winners. The losers never tell their stories.

4) I don't like blended and actively managed funds because it is impossible to tease out the performance of the equity portion separately.

5) There is no data that says that an actively managed fund's track record, no matter how long, is predictive.* In fact, some would argue that regression to the mean is lurking in the shadows.

6) YMMV but we don't buy bond funds. The value of the asset fluctuates and the fees in this interest rate environment eat a significant portion of the yield.

7) Buying long bonds means guessing about future inflation. We aren't smart enough to predict that, so we just buy TIPS. IMO these are the most misunderstood security out there.

8) We are not smart enough to time the market either. We look at our portfolio seriously once a year between Xmas and New Year. Some years we even make a trade.

9) Firecalc and all the other similar programs out there can only project history. They cannot make actual predictions. Tomorrow will not be like yesterday. We know that.

-------------------------------------------------------
* Apologies to those who have seen this posted previously, but IMO it provides critically important information.


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Old 03-13-2020, 01:51 PM   #3
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Too complicated.

60% Total Stock, 35% Total Bond and 5% cash would be simpler and just as good if not better.

If you really want to get spicy, substitute 42% Total Stock, 18% Total International Stock for 60% Total Stock and/or 26% Total Bond and 9% Total International Bond for 35% Total Bond.

Do you have any tax efficiency issues to be considered? IOW, is any of this money taxable funds or is it all tax-deferred?
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Old 03-13-2020, 02:29 PM   #4
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First, I wouldn't do anything because of the current volatility that's going on. That is indeed market timing.

Second you really need to take a look at how much volatility you're willing to live with (notice that I used the word volatility, not "risk"). In my opinion, that is best resolved by determining your stock vs. bonds allocation, not by breaking a portfolio down into tiny chunks.

Third, what you propose is fairly complex. A 5% holding isn't going to do much to move the needle one way or another. Even though your did monte carlo on this, unless you did it taking into account both momentum effects (very few do), correlations between assets, and the fact that the assets have not historically followed a normal distribution, your results are going to be skewed. Additionally, for some assets like REITs and Gold, they just haven't been around all that long compared to stocks and bonds.

Forth. Related to the points above. I wouldn't get caught up in false precision given the random nature of most assets. I usually think of putting an AA together with an axe, not a scalpel. Think 10% absolute minimum for an asset.

You mentioned monthly rebalancing. We already have some threads going on regarding rebalancing. Most people fall into one of two camps: Rebalance bands (either/or absolute or relative) or time based (anywhere from once per quarter to once a year or so). Not much difference in performance one way or another, but in my opinion once per month is gross overkill and even worse if this is being held in a taxable account where rebalancing may cause a taxable event.

You didn't mention whether this was all in a taxable account, tax deferred or a mix. Nothing at all wrong with Wellington but it's going to throw off dividends pretty often and isn't going to be tax efficient if held in a taxable account. I would strongly suggest going simple with a boglehead 2 or 3 fund portfolio with international being optional. You might want to consider an Intermediate Treasury bond fund instead of TBM if the size of drawdowns concern you. At least in recent history, during stock market churn, it has provided better ballast than TBM, but it's not guaranteed. Another option might be to take some of the US stock and add anywhere from 10-50% small cap value or mid cap value to the mix, but realize that this might underperform a straight 2 fund boglehead portfolio for long periods of time.

Then set & forget except when it's time to rebalance.
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Old 03-13-2020, 03:48 PM   #5
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Quote:
Originally Posted by pb4uski View Post
Too complicated.

60% Total Stock, 35% Total Bond and 5% cash would be simpler and just as good if not better.

If you really want to get spicy, substitute 42% Total Stock, 18% Total International Stock for 60% Total Stock and/or 26% Total Bond and 9% Total International Bond for 35% Total Bond.

Do you have any tax efficiency issues to be considered? IOW, is any of this money taxable funds or is it all tax-deferred?
Actually according to Portflio Visualizer backtesting, the simple portfolio is better.... much better.

https://www.portfoliovisualizer.com/...location12_1=5
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Old 03-13-2020, 04:08 PM   #6
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Originally Posted by pb4uski View Post
Actually according to Portflio Visualizer backtesting, the simple portfolio is better.... much better.
Yes, but backtesting over six years is a pretty short period especially since the OP probably has 30 years of investing ahead of him. Also, during the past decade internationals have underperformed, so any comparison, like between #2 and #3, the portfolio without internationals will outperform.

I don't think it is wise to avoid any sector just because recent history says it is weak. That is really not passive investing. More to the point, reversion to the mean lurks for internationals and for the US, and any significant devaluation of the dollar (which I believe is inevitable) will make holding internationals look brilliant.
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Old 03-13-2020, 04:54 PM   #7
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Thanks so much to all of you so far. By the way for more context:

I'm 54, semi-retired. Half my NW is portfolio in various retirement accounts (1M) while half+ is in rental property which takes care of our needs so we don't have to touch the portfolio. So any talk of portfolio mix will be done inside either a ROTH, solo 401k or tIRA.

Portfolio is
My ROTH, tIRA, Solo 401k, My wife's ROTH, tIRA, solo 401k, Annuity worth about 90K, Crypto account, small investment wine account (I'm only telling you this because you're all too far away to slap me!), 5% of portfolio in lending club and prosper (rock steady 4-6% CAGR since 2007)

Then the 29 rental units (5 bldgs) which we bought over 3 years as a reaction to the FIRST meltdown of 2007. I didn't sell a thing...I margined the heck out of it in 2009, which ended up being such a great thing (i.e. market rose, making it easy to pay off, and I didn't sell at the bottom)

So as you can see I can't help but dabble. But that's coming to an end.

I am really hoping it's true that the 3-4 funds you recommended will work just as well as the one I suggested. I would like to keep some cash as well, though I know that is a super drag on returns when things are heating up.

Reading on!
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Old 03-13-2020, 05:05 PM   #8
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Originally Posted by OldShooter View Post
Yes, but backtesting over six years is a pretty short period especially since the OP probably has 30 years of investing ahead of him. Also, during the past decade internationals have underperformed, so any comparison, like between #2 and #3, the portfolio without internationals will outperform.

I don't think it is wise to avoid any sector just because recent history says it is weak. That is really not passive investing. More to the point, reversion to the mean lurks for internationals and for the US, and any significant devaluation of the dollar (which I believe is inevitable) will make holding internationals look brilliant.
My point was that the added complexity of the OPs portfolio doesn't add any value. Are you disputing that?

The link below eliminates international bonds and puts them in total bond and substitutes the Inv version of International Stock for the Admiral version and extends the time horizon to 15 years.... but the conclusion is the same... the added complexity doesn't add any value.

https://www.portfoliovisualizer.com/...location12_1=5
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Old 03-13-2020, 05:23 PM   #9
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My point was that the added complexity of the OPs portfolio doesn't add any value. Are you disputing that?
Well, I would rephrase, then not dispute that " ... the added complexity of the OPs portfolio doesn't add any value over the short time period that was modeled." I also would be very surprised if it did any better over longer periods. As you say, it is much too complicated. My post was considering only the two simple alternatives you modeled, with and without international.

Re avoiding complexity as a general principle, rememberI am the one-fund guy.

I actually wasn't paying any attention to the international bond component. Only to equity. I know less about international bonds than I do about corporates, which is not much. My general feeling is that the money in the fixed income side is there for safety, so chasing yield with international, junk, etc. is irrational. So I would certainly agree that complexity on the fixed income side is to be avoided. Given your interest in CDs I think you probably agree.

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... So as you can see I can't help but dabble. But that's coming to an end. ...
Coincidentally, I was about your age, with 30 years of investing under my belt, when I figured out that the more I played with my food, the less food I had. Slow learner, I guess.
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Old 03-13-2020, 05:30 PM   #10
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I guess purposely paying someone the annual fees to watch my money would be the thing that kept me up at night (and make the FA sleep like a baby).

I routinely make 5-10% YTD more than any other person I know, but by meddling myself.
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Old 03-13-2020, 06:53 PM   #11
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Too complicated.

60% Total Stock, 35% Total Bond and 5% cash would be simpler and just as good if not better. ...
I like it. Though for me, I'd say just enough cash to meet a few months of bills, plus a bit to give some flexibility if you need to draw from any accounts. Probably a bit less than the 5% above.

Quote:
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...

Do you have any tax efficiency issues to be considered? IOW, is any of this money taxable funds or is it all tax-deferred?

That's the issue. Need to move carefully, maybe over a few years if you can keep gains in the 0% bracket.

-ERD50
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